A company must comply with several rules and regulations if it wishes to have its stock listed on the stock exchange. This is necessary to maintain the standards of the exchange and to regulate membership. The confidence of investors in the stocks being traded is a key factor in stock market stability. Only public companies that meet these requirements can enlist on the exchange to maintain trust.
A stock that is listed on the stock exchange is delisted. It can no longer trade and is therefore removed from the stock market. Simply put, delisting is the permanent removal of a company’s stock from the stock exchange.
It is possible to wonder what happens to a stock when it is delisted. If a stock is delisted, the company has two options: trade on the Over-the-Counter Bulletin Board and the pink sheets system. It will trade on the Over-the-Counter Bulletin Board if it has the financial statements up-to-date. This is more regulated than the pink sheets. If that is impossible, it will choose pink sheets which are the least regulated in the public-traded equity markets.
A stock that drops below one of these levels will generally lose the trust of investors because it has not met all the requirements of major exchanges. Institutional investors may lose interest in the stock if it is not delisted for a while. They will stop trading and researching the stock. Investors will have less information about the stock and company. This results in lower liquidity and trading volume.
If they do not sell their shares, they will still be able to own the shares. However, it is common knowledge that a delisted company is a sign of future bankruptcy. It is important to examine the reasons behind the delisting of stocks that you own and the potential impact on your financial situation before you decide whether to keep them.
You can choose to delist either voluntary or involuntary. The voluntary delisting process is only considered successful if the total shareholding of the acquirer, together with the shares offered by public shareholders, equals 90% of the company’s share capital. This is not allowed to be done by the company's promoter. A reverse book building process is used to arrive at the floor price.
Only after the official approval of the delisting process, shares can be officially delisted. The residual shareholders are given a one year exit window to sell the shares at the price they agreed to during delisting. A voluntary delisting cannot happen in a hurry. Investors are allowed ample time to dispose of their stock. Investors who choose to retain their shares after delisting will still have legal ownership rights.
Involuntary delisting is when a company, its directors, group companies and promoters are banned from entering the securities markets for ten years starting from the date of delisting. Promoters must buy shares owned by public shareholders at a price that is determined by an independent valuer.